People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 08

February 21, 2010

States as Scapegoats for Food Price Inflation


C P Chandrasekhar


GROWTH rather than inflation, the government admits, is India�s problem number one. With food prices still rising at an annual rate of around 18 per cent, the UPA government at the centre has been forced to recognise that it constitutes a problem that deserves more attention than the objective of achieving a 9 or 10 per cent rate of growth. But there is little of substance that it appears to be doing to bring down prices. In fact, the effort seems to be to declare the problem as being partly unavoidable and temporary and as partly the result of acts of commission or omission of the state governments or of non-Congress segments of the central government.

This appears to have been the intent also of the special meeting of chief ministers convened in Delhi to ostensibly discuss the food price inflation and work out solutions. The outcome of the meeting is indeed surprising. After getting the heads of 24 state governments together, the prime minister in his inaugural address declared that the worst was over on the food inflation front and that the government would be able to stabilise food prices soon.

Having thus induced a sense of complacency about future price trends, the centre chose to identify the inflation that has been with us for the past few months as being the fall-out of policies and developments elsewhere in the domestic and world economy. Among the reasons reportedly cited for the price rise in the course of deliberations at the conference were increases in the minimum support price for farm produce instituted to help the farming community, increases in international prices, increases in demand �due to the increase in purchasing power� resulting from higher growth, excess liquidity in the system, �inefficiencies� in marketing of farm produce and the high cost of intermediation. While action to deal with some of these has been promised in the past and that promise reiterated at the meet, many of the factors seen as driving inflation are either out of the centre�s control or otherwise positive economic outcomes that cannot be countered.  

This amounts to an implicit declaration that food price inflation of some intensity is inevitable. Hence the principal outcome of the chief ministers� meet was a set of proposals aimed at monitoring inflation so as to act early whenever it threatens to be excessive and to deal with inflation-inducing supply constraints in some commodities, through long term efforts at strengthening in agriculture. Towards this end, the meeting constituted a Standing Core Group to suggest measures to deal with price rise, propose steps for improving the public distribution system and the procurement of foodgrains and find ways of reducing the gap between farm gate prices and retail prices. For the long term, the Standing Group will also suggest measures for increasing agricultural production and productivity, including long-term policies for sustained agricultural growth.

Besides the union finance minister, the union agriculture minister, the deputy chairman of the planning commission and the chairman of prime minister�s economic advisory council, the group will comprise of the chief ministers of Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Madhya Pradesh, Punjab, Tamil Nadu, and West Bengal.

While all efforts at consulting with the states on issues of economic importance are laudable, the constitution of this committee seems to be motivated by political considerations rather than a search for improved economic management. To start with, a joint committee of the centre and the states sends out the signal that the governments in the states are as much responsible for allowing inflation to reach the levels it has reached. Second, it underlines the argument which has been made for some time now that the states need to do more to help the centre combat the current inflation and prevent the recurrence of such episodes of inflation in future. In fact, the prime minister , who had earlier argued that the states were not doing enough to deal with speculation, attributed the wide gap between farm gate and retail prices partly to the proliferation of state and local taxes, cesses and levies. When claiming that taxes on food items added an additional cost burden of as much as 10-15 per cent at the retail level, he was implicitly suggesting that the states should forego revenues to neutralise some of the price increase. Besides this, he made a case for enhancing competition at the retail level by opening up the retail trade, though the evidence elsewhere is that this merely increases concentration at the retail level and widens rather than reduces trade margins.

All this helps divert attention from the longer term and more recent policies of the central government that were responsible for generating the current high levels of commodity price inflation even when demand supply imbalances are restricted to a few commodities. While there is some consensus on the role of speculation in driving inflation, official statements ignore the importance of liberalised marketing arrangements, liberalised futures trading, long term supply-demand imbalances resulting from the neglect of agriculture and errors in supply management in the case of commodities like sugar in ensuring that speculative expectations of a rise in prices are realised. Moreover, with its emphasis on subsidy reduction and targeting of food distributed through the public distribution system, the centre has paid little attention to enhancing the spread and penetration of the PDS, making it a less potent instrument to combat speculation. In fact, many states have complained that they have not been allocated adequate supplies to cater to the demands of the above poverty line population, undermining the role of the PDS as a safeguard against inflation in open market prices. Given this background, it is unclear why the state governments should accept the centre�s reading of the intensity, temporal spread and determinants of the current inflation and endorse the policies it recommends to deal with the problem.  

The problem is unlikely to just go away as the prime minister expects because the foreign exchange reserve the country has accumulated, which facilitates imports to augment supplies, is also not an effective antidote against inflation. There are two difficulties here. First, as the RBI�s recent policy review statement notes, �the global rates of increase in the prices of sugar, cereals and edible oils are now appreciably higher than domestic rates�, so that the opportunity to use imports to contain domestic food prices is limited. Second, even where imports can be resorted to, managing distribution to reach supplies to where they are needed is not easy given the limited spread of the public distribution system. It is the resulting erosion of its ability to ensure low inflation while pushing for reasonable growth that the government�s anti-inflation propaganda seeks to conceal.

This raises the questions as to why the centre seems so complacent about the ongoing inflation. One reason is the absence of strong and adequate protest. Till quite recently the presence of or movement towards �double-digit� or 10 per cent or more inflation was adequate to precipitate mass protest and destabilise governments. Compared to that, the current level of protest when food price inflation is running in the 20 per cent range is bad for the poor even if comforting for the government. Two factors possibly account for this inadequate level of protest. First, the government has won the implicit or explicit support of sections of the vocal middle class that were earlier responsible for leading the protest, articulating its content and mobilising support. They have been coopted by favouring them with some of the benefits of growth. Second, with the next set of elections that are significant enough to begin to redefine the political landscape still distant in time, opposition parties have been lackadaisical in taking political advantage of the opportunity to weaken the incumbent government that high inflation offers.

But sporadic protests in different parts of the country are increasing in number and gaining in strength. The state governments should seek to capitalise on this and exert their own pressures to demand more action from the centre. While leaders of the opposition parties and chief ministers of states ruled by non-Congress parties have declared in the chief ministers� conference and outside that the current inflation is largely a result of the centre�s policies, their participation in the centrally driven effort to rein in inflation does amount to playing into the hands of the centre. Rather than serve as honorary advisers to the centre, the state governments would do well to devise their own strategies to protect the vulnerable sections from the adverse effects of the recent price increase and ensure that inflation is kept in control in the future. They could then support each other in their effort to get the centre to fall in line, both in terms of adopting similar policies as well as providing the states the resources needed to pursue their strategies. This, rather than participation in meetings and committees in which they are talked down to would be much more in their interest.